Foreign direct investments into India from low-tax regimes such as Mauritius, Singapore and Cyprus accounted for 52.6 per cent of the total flows into the country in the first four months of the current fiscal.
The latest performance restores to these three countries the record of accounting for more than half of the annual flows that they had enjoyed in all the earlier years, barring the last two fiscals.
Their contribution had slipped to 45 per cent in 2010-11 and 48 per cent in 2011-12. Latest data of the Department of Industrial Policy and Promotion (DIPP) show that 51 per cent of the cumulative FDI flowing into India in the last 12 years has originated from offshore business centres such as Mauritius, Singapore and Cyprus.
Of the total FDI in India during April 2000 to July 2012, Mauritius accounted for the lion’s share of 37 per cent. But in the backdrop of heightened awareness on financial loopholes facilitating round-tripping, besides the uproar over black money, the proportion of FDI from the Mauritius had dipped to 28.3 per cent of the total kitty in 2011-12.
This has now recovered to 33.3 per cent in the first four months of the 2012 fiscal, still below the long-term average.
Surging Singapore
While a slowdown in FDI from Mauritius is discernible, there has been a surge in investments from Singapore.
In April-July 2012, FDI flows from Singapore accounted for 15.2 per cent of total investments. Singapore’s share of total FDI stood at just 7.9 per cent in FY11, but then rocketed to 15 per cent in FY12.
Its share in the first four months of 2012-13 was higher than the long-term trend of 10 per cent for the April 2000-July 2012 period. Inflows from Cyprus constituted 4.1 per cent of foreign direct investment in April-July 2012, in line with the long-term trend.
In contrast to the tax havens, the share of most other nations’ investments in India has declined from 2010-11 levels. The UK’s share fell to 6.9 per cent in the first four months of 2012-13 from 12.6 per cent in FY’11, while the US’ contribution declined from 5.5 per cent of total flows to 3 per cent.
Whether pumping FDI into India via offshore business centres amounts to tax-dodging is a moot point, it seems. For example, when the Indian Government brought out its white paper on black money, a paragraph highlighting the high volume of FDI from Singapore — while steering clear of terming the nation a tax haven — prompted Singapore Prime Minister Lee Hsien Loong to make a formal complaint to Prime Minister Manmohan Singh.
The Legality
In a similar fashion, petitions to the Indian judiciary contesting the legality of foreign entities setting up shell companies in Mauritius in order to claim tax benefits under that nation’s double taxation avoidance convention with India have been turned down.
In its ruling on one such case, the Supreme Court noted that such entities were liable to pay tax in the Mauritius; it just so happened they were not taxed there.